RETAIL SECTOR DEPRESSES SUPERVALU EARNINGS

MINNEAPOLIS -- Supervalu here said last week its earnings for the second half of fiscal 2001 would be lower than previously expected.The company attributed the earnings shortfall largely to challenges in its retail sector. In particular, it cited its effort to establish its everyday-low-price warehouse format -- Cub Foods, in Chicago -- an effort, the company said, that has required greater than expected

MINNEAPOLIS -- Supervalu here said last week its earnings for the second half of fiscal 2001 would be lower than previously expected.

The company attributed the earnings shortfall largely to challenges in its retail sector. In particular, it cited its effort to establish its everyday-low-price warehouse format -- Cub Foods, in Chicago -- an effort, the company said, that has required greater than expected advertising and promotion expenses while achieving lower than expected comparable-store sales.

Supervalu faced two other challenges last week:

Cub Foods removed all fresh ground beef and unboxed frozen beef patties from its shelves after the Minnesota Department of Health linked the products with an E. coli outbreak, and Supervalu notified its distribution customers and recommended they do the same. (See story, Page 4)

Genuardi's Family Markets, Norristown, Pa., a Supervalu distribution, announced it is being acquired by Safeway, Pleasanton, Calif. Supervalu stands to lose $380 million in annual business after its contract with Genuardi's expires in October 2001. (See story, Page 1)

But neither of these developments contributed to the lowered earnings expectation announced last week.

The company said comparable-store sales are likely to decline 3% in the third quarter, ending Dec. 18. Earnings per share for the quarter, the company added, are expected in the range of 36 cents to 38 cents, in contrast to last year's 42 cents.

For the fourth quarter, ending Feb. 24, Supervalu said it expected earnings per share to be in the range of 45 cents to 50 cents, in contrast to last year's 51 cents.

Company officials acknowledged that Supervalu's retail strategy had been less than successful. In a conference call with analysts last week, Michael Wright, Supervalu chairman and chief executive officer, said, "We fully recognize that some of the shortfall is due to our decision to build the Cub network in Chicago. Our execution should have been better."

Among the steps being taken to improve the situation at Cub, Supervalu said last week it has named John H. Hooley corporate senior vice president at Supervalu and president and CEO at Cub Foods.

Hooley, who had joined Cub in 1974, was Cub president and CEO from May 1993 to March 1999, when he left to an incentive click-and-mortar startup funded by Carlson Co., the hospitality/incentive/travel giant based here.

Jeff Noddle, Supervalu president and chief operating officer, told analysts during the same conference call that Hooley brings to his new position "exceptional management skills along with experience as a management member of the original Cub family."

In addition to installing new management, Noddle said Supervalu is looking to improve its retail performance by:

Reducing store-level expenses and improving store-level performance. Noddle explained that this effort extends across the company's entire retail sector. "Consistent customer-service levels are not a negotiable issue with me," he said. "Solving store-level issues is important to solving sales problems."

Competing better against superstores. In the second quarter, 40% of Supervalu's stores saw superstores open in their market areas, according to Noddle. "Many new supercenters attract customers who eventually return to us," he said, "but we need to aggressively manage costs to accelerate the recapture of customers."

Better targeting its capital investment. One of the company's principal investment targets will be its Sav-A-Lot limited assortment stores.

Noddle said Supervalu plans "a new geographical expansion of the chain," adding 145 stores next year, in contrast with 105 this year.

Wright also said, "Sav-A-Lot has continued to deliver same-store sales growth," adding that Supervalu's "retail shortfall is limited in scope."

However, Supervalu said it is considering reducing capital spending by approximately $100 million in fiscal 2002. One way the company said it will do that is by focusing more on remodels and less on new building. Noddle said Supervalu plans to do 30 remodels next year, in contrast with only nine this year.

Jonathan Ziegler, San Francisco-based managing director of Deutsche Banc Alex. Brown, New York, told SN he expects Supervalu to succeed in its retail efforts in Chicago, even though the environment has grown more competitive.

"Costco has opened more clubs there," he said. "Meijers has gone in. But there's a great opportunity there for an EDLP operator with a warehouse format.

"There's real room there for someone like Cub, as long as they stay EDLP and put some management attention to the stores. I'm not sure what went wrong, but it's a problem to be running comps like that."